1989 (4) TMI 137 - AT - Income Tax

Summary

Issues Involved:
1. Ownership of the new constructions.
2. Nature of the expenditure (capital vs. revenue).
3. Levy of interest under sections 139(8) and 217.
4. Disallowance of interest on borrowed funds.
5. Treatment of salami payments.
6. Deduction of telephone deposit.

Issue-wise Detailed Analysis:

1. Ownership of the New Constructions:
The Tribunal examined the head-lease and sub-leases and concluded that any new construction on the demised premises would become the property of the waqf, even during the lease period. This finding was based on the clauses in the lease agreements, which indicated that the waqf would own the superstructures built by the lessee or sub-lessees. The CIT(A) had contradictory findings regarding ownership, which the Tribunal found confusing and incorrect. The Tribunal reaffirmed that the ownership of the new constructions vested with the waqf, not the assessee.

2. Nature of the Expenditure (Capital vs. Revenue):
The Tribunal considered whether the expenditure of Rs. 1,57,925 on new constructions should be treated as capital or revenue expenditure. The assessee argued it should be revenue expenditure as the constructions would belong to the waqf. The Tribunal referred to several case laws, including the Orissa High Court decision in CIT v. J. N. Bhowmick and the Andhra Pradesh High Court decision in CIT v. Singareni Collieries Co. Ltd., which supported the assessee's position. The Tribunal concluded that the expenditure was incurred to carry on the business profitably and was obligatory under the lease terms, thus qualifying as revenue expenditure.

3. Levy of Interest under Sections 139(8) and 217:
The assessee contested the imposition of interest under sections 139(8) and 217, arguing that the CIT(A) did not address this issue. The Tribunal cited the Andhra Pradesh High Court decision in CIT v. Padma Timber Depot, which held that assessments made for the first time under section 147 should be regarded as regular assessments only from 1-4-1985. Since the assessment year in question was 1982-83, the Tribunal directed the CIT(A) to reconsider the issue in light of this decision.

4. Disallowance of Interest on Borrowed Funds:
The ITO disallowed Rs. 12,209, claiming that Rs. 89,227 of borrowed funds were diverted for non-business purposes. The assessee argued that no direct link was established between the borrowed funds and non-business advances. The Tribunal accepted the assessee's explanation that certain amounts were available to offset the alleged diversion and concluded that the ITO and CIT(A) erred in their findings. The disallowance was deleted.

5. Treatment of Salami Payments:
The Tribunal addressed the issue of salami payments made to tenants for vacating premises. The CIT(A) had disallowed these payments, but the Tribunal found this inconsistent with its earlier decision that salami receipts were revenue in nature. The Tribunal held that salami payments should also be treated as revenue expenditure, as they were made to enhance the business's profitability by securing higher rents from new tenants. The disallowance of Rs. 7,000 was reversed.

6. Deduction of Telephone Deposit:
The assessee claimed a deduction of Rs. 9,257 for telephone deposit, which was disallowed by the Lower Authorities. The Tribunal admitted additional evidence showing that the amount was spent on annual rent, installation charges, and conversion of lines, which are revenue expenditures. The Tribunal found that the Lower Authorities misunderstood the nature of the expenditure and reversed the disallowance.

Conclusion:
The Tribunal allowed the assessee's appeal on all points, reversing the findings of the Lower Authorities and directing the CIT(A) to reconsider the issue of interest in light of relevant case law.